Transaction cost economics and contractual relations

Abstract

One of the key factors in the study of transaction costs economics is the concept of opportunism. Williamson (1986) develops a heuristic model of transaction costs and governance structures in which the critical dimensions, with respect to which transaction costs differ, are identified: the frequency of exchange, the degree of relationship-specific investment, and uncertainty. This work examines whether there is empirical support for Williamson's model. Firms in four different industries were interviewed about their contractual relationships with their customers or suppliers. The degree of transaction costs differs both across industries and across firms within an industry. Although we find that there is strong support for the Williamson (1986) model, a critical dimension omitted from this model is market structure. By affecting the risks of opportunism, we find that market structure also has important consequences for the nature of contractual relations governing firms' transactions.